This is from this morning's FT:
Germany sold two-year government debt at a record low yield of minus 0.38 per cent on Wednesday, in a move reflecting expectations of further monetary easing for the eurozone next month.
The policy-sensitive two-year bond offers a coupon of zero, meaning investors in effect pay to own it to maturity. About 10 eurozone countries have two-year debt at negative yields, and investors expect the European Central Bank to cut the rate it pays on overnight deposits, which stands at minus 0.20 per cent, further into negative territory.
On Wednesday Portugal sold 12-month and six-month government debt at negative yields for the first time. Denmark sold DKr3.6bn of three-year debt at an average yield of minus 0.31 per cent and Sweden offered SKr15bn of three-month bills yielding minus 0.42 per cent.
Let's be clear what this means: one implication is that the savings glut of big business is being invested at negative interest rates. The managers of these companies are so bereft of ideas they will pay governments to take cash off their hands. If that isn't a definition of management failure I am not sure what is.
But what I also hear is that the demand for high quality collateral in some sectors is now so high because of Basel (in particular) that the price of government bonds does not matter: what is important is that there be enough of them.
In other words, people want more debt than governments are willing to supply. Which is quite astonishing, because the question that is then begged is why when this is the case and when people so obviously need the services that government can deliver that sufficient debt cannot be created by government running deficits?
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No doubt if those negative interest rates were rebranded and repackaged as a tax the managers of those savings would be diverting the money to the Cayman Islands or Luxembourg.
But don’t fret. I’m sure someone will be along soon to explain to us that this is a really sensible way of doing things and is just another wonderful example of the market working it’s miracle.
Sorry, I’m no expert on this, but how do you know that these Bunds etc aren’t indeed being purchased as reserves by the very offshore banks in which tax-avoiding entities are depositing their money?
After all, if you’re already quids-in having avoided paying anything between twenty to forty percent in taxes, the loss of one or two percent is peanuts in return for security.
That is possible
As I made clear: the demand for bonds is very high
Inclduing from offshore
My apologies.
I was engaging in what is the national pastime of these islands, which seems to be naturally inherent in our character.
I’ll try to be less deadpan in future.
It would be nice to know who “invested” in this debt and why? I don’t suppose it’s possible to find out who a government borrows from on its citizens behalf (or is it?)
Can you imagine the financial rationale for taking these positions, that there is a logical case for very intelligent people to “invest” their clients (or their own) money in government debt that is guaranteed to lose them money!
To say it is not normal financial behaviour is an understatement, but there must be some perverse logic to it that is beyond my simple mind.
I do not know who is buying
But I am told the need is for bank collateral
I seem to remember Yanis Varoufakis pointing out that the ECB has to buy large quantities of German govt bonds (and all other Euro zone govt bonds) as part of their QE programme. So is this just central banks taking on unprofitable debt as part of a different objective?
In the same way the Bank Of England is now one of the largest owners of UK govt debt.
I doubt it
This is short term debt less likely to be in that programme
You’ve never really explained why we need to “sell debt” just because someone wants to buy it. What’s in it for us? I would favour that all countries, including the UK, should move to balance their trade. If we do that then there’s much less need to sell debt.
Say the Chinese were the buyers. What would they do with their spare cash if they couldn’t buy debt? Wouldn’t they have to find some other productive use for it?
“Let’s be clear what this means: one implication is that the savings glut of big business is being invested at negative interest rates. The managers of these companies are so bereft of ideas they will pay governments to take cash off their hands”
That is not what is suggested by research from the Bank of England. http://bankunderground.co.uk/2015/07/24/are-firms-ever-going-to-empty-their-war-chests/
“But what I also hear is that the demand for high quality collateral in some sectors is now so high because of Basel (in particular)”
How does this have any bearing on the activities of the corporate non-banking sector? Or, in other words, from whom are you hearing this claptrap?
The message is coming from bankers
And the BoE is not the source of all wisdom